Private real estate investment is getting a lot of press.
The idea has merit, with yields down on C.
D.
's, and uneasiness of the stock market ebb and flow.
With crowd funding, in its infancy, with limited rules, is confusing, might even be a scary world to have faith in.
There are alternatives.
The Job's act of 2012 enabled public advertised investments are privately available.
These are currently "limited" to "sophisticated" investors, with net worth requirements by the S.
E.
C.
under section "D" of 506 (C) regulations.
Investments are acknowledged, but not endorsed by the S.
E.
C.
With a Private Placement Memorandum, (PPM), however, a clearer offering is presented.
This is not a business plan, but rather a clear- headed approach with risks, including a complete loss of investment.
Investors are accustomed to this, with very little guarantees to investing as a whole.
What are the reasons consider this "new deal" financing program for the average investor? The investor gets a solid grasp of the investment, rather than the germane platitudes of the multi-national corporation or its commissioned salesmen.
Rather than get the watered down yield spread after commissions and overhead, the investor is paired with the client(s), borrower(s), and the servicing provider who originates, formulate, and services the loan.
A streamlined cost efficient process.
Yield's can surpass the C.
D.
rates, and hedge funds.
The servicing provider can be the key, after all, not all private investment are the same.
As a private investor, you have to take responsibility to underwrite your servicing provider, AND their offerings, and hold them accountable.
Items to watch for.
How much of your investment capital goes to the project directly? There is a lot of lee way in organization costs and development expense.
If you are expecting a good return, starting out with a significant amount of your capital siphoned at inception to fund expenses and commissions, is not a good start! With all of your funds arriving intact, directly to the project you have a much greater chance of return OF your capital and a return ON your capital.
What is your collateral? In a debt security, the equity value, of the borrower, considered "skin in the game" is a vital issue.
The thought, for example, that debt investment, not necessarily ownership of the project, is safer, coupled with sensible loan to value, and sufficient debt ratio, assures the quotient of safety and return.
With the banks, currently, shy and retiring from main street lending, a great opportunity is provided for extremely high quality loans, via a debt investment, with the lynchpin of a comprehensive first mortgage, and security agreement, with loan caveats and protections.
In the old-fashioned mindset, that "if it quacks like a duck, it must be a duck! So if it doesn't make sense, don't do it! The foremost is always, how do you get repaid? A balance sheet with cash flow and sufficient monthly debt ratio, is a solid start.
I personally, don't want to "assume" or predict, the future, Or engage in "if come" scenario's.
I want to be assured by the fact that what has occurred, is likely to repeat itself, with the current management and economic climate.
We can NOT crusade, reinvent the wheel, making a sow's ear into a silk purse.
This is a big red flag, and would necessarily increase the risk.
Finally, What is the exit strategy? Once involved you need to find out how and what procedures are available for an exit strategy.
Assuming the loan will mature with a short window, and if that window corresponds with you capital investment, it can be a "hold to maturity" investment.
Other possibilities are longer term with interest rate adjustment periods, to make your investment current and inflation proof.
In the 506 (C) investments, there is a requirement to hold the investment for a year.
This is not the space for day traders.
After a year, the investment is "a safe harbor" investment which can be sold publicly, but not on the registered stock exchanges.
There are no guarantees that a buyer, with a suitable offer is out there! Interior transactions with the service provider and other unit holders who can increase their holdings might be the best market.
Go forward with caution.
I would suggest a personal underwriting philosophy, of valuing the qualities of the investment.
With the investor and the borrower on even footing.
We can refer to this as synergy.
In my mind, the borrower cannot succeed without the investor's funds, the investor's value and profit require the success of the borrower's vision and management.
I would be keenly aware that 100% value of the your investment capital is put to work, fully, in the debt investment, Supported by a first real estate mortgage, in a bankruptcy remote structure, restricted outside borrowing, and demonstrated interior cash flow with fixed rate monthly return.
Remember, no investment is right for all investors.
Knowledge however, is always the investors best friend.